Bitcoin and the Cypherpunks

Will recent breakthroughs in computer science make truly free markets a reality?

Uber has made waves by undermining the government's hold over the taxi industry while making it easy for anyone with a car to become a driver and anyone with a phone to hail a car. But for some radical entrepreneurs, the ride service hasn't gone nearly far enough. Take Matan Field, a 35-year-old Israeli and theoretical physicist, who is the cofounder of a venture called La'Zooz. His aim is to bypass not just regulators but all kinds of middlemen, liberating the taxi industry from external controls altogether. And Field doesn't plan to stop there. "It's a new vision for the economy," he says, "that's much bigger than transportation."

Field is part of a self-branded "decentralization" movement coalescing around the idea that recent breakthroughs in computer science have made it possible for individuals to exchange goods and services without the involvement of any third party.

Some of the highest profile firms in tech—including Uber, Lyft, eBay, Etsy, and Airbnb—are essentially marketplace operators that facilitate trade between independent buyers and sellers. In return, they extract fees, put limits on who can participate in the market, and occasionally hand over personal information about their users to the government.

Not for much longer, perhaps. The theory is that these new decentralized marketplaces will allow anyone to buy anything from anyone anywhere with as much privacy as they want, and that repressive governments will have little recourse to stop them. Brian Hoffman, the project lead on an eBay-like decentralized peer-to-peer marketplace called OpenBazaar, says that getting to know his wife's Iranian family is part of what made him want to get involved. "It gave me a first-hand look at how hard it is for people to conduct any kind of online commerce across borders," says the 32-year-old developer. "Just to get an iPhone in Iran is such an encumbering process."

The decentralization movement takes the ethos of the cypherpunks—a community that came together in the early 1990s around the idea that cryptography could preserve online freedom by shielding communications from the government's purview—and extends it to the exchange of goods and services. The movement's philosophy, Matan Field and others say, is best summed up by a quote from the inventor and theorist Buckminster Fuller: "You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete."

But Field and his cohorts face a befuddling problem: How do they convince anyone—other than drug dealers and thieves—to actually participate in the elegant systems they're creating? A handful of these marketplaces launched late last year, and almost nobody is using them. Slow uptake is far from a death sentence for early-stage companies, but there are other reasons to fear that these entrepreneurs and techno-utopians are ill prepared for the challenges the old world presents for the new one they are trying to create.

Bitcoin and Decentralization

Decentralized peer-to-peer marketplaces became technically possible only in 2009, when a shadowy figure calling himself Satoshi Nakamoto gave the world a new form of virtual currency called Bitcoin. More than just a new form of money, Bitcoin is also a protocol, or system for managing information, that has the capacity to undergird—and revolutionize—much of the Internet.

Reut Field

eBay facilitates trade among its users in a multitude of ways: by tracking the reputations of buyers and sellers, arbitrating disputes, and establishing ground rules about what can be bought and sold. It also hosts product listings on its servers and maintains a central ledger of who sold what to whom and at what price. Enter Bitcoin's core feature, the "distributed ledger," also known as the "blockchain," which allows strangers to trust each other without the involvement of a third party. In a nutshell, when bitcoins are traded between two parties, a record of the transaction is broadcast to the entire community and then eventually added to the blockchain.

Everyone in the world running Bitcoin client software maintains a duplicate copy of at least a portion of what's essentially a shared file. This gives the network tremendous resilience. Deleting or altering past transactions recorded to the blockchain would involve invading the homes of every person in the world running a Bitcoin client and commandeering their personal computers. NXT FreeMarket, another decentralized peer-to-peer marketplace, records all of its product listings and trades to the blockchain. So instead of relying on a central operator like eBay to be a repository of information, every user maintains a duplicate file detailing every product for sale and every trade that takes place on the platform.

It doesn't sound so user-friendly, but it is; buyers and sellers simply install an easy-to-use application on their home computers that reads the blockchain and makes product listings simple to create and locate. (NXT FreeMarket, which launched in October 2014, utilizes an alternative form of cryptocurrency called NXT that's similar to Bitcoin in most ways.) As of mid-February, about 1,000 users had downloaded NXT's client application and were trading approximately three or four items per week.

OpenBazaar's developers took a different approach to creating a decentralized peer-to-peer platform. Its product listings aren't stored in the blockchain; rather, they live on each seller's home hard drive. Users simply run an application that works like BitTorrent, a popular technology that lets strangers share files directly with each other. BitTorrent is commonly used for illegally sharing copyrighted videos. It's entirely peer-to-peer and doesn't route through a central server, so big media companies are virtually powerless to stop its use. The same is true of OpenBazaar, which launched last August in beta.

OpenBazaar does use Bitcoin to resolve the inevitable conflicts that arise when people sell things to each other. Bitcoins are stored at a virtual address, and a secret password is required to transfer funds from one address to another. OpenBazaar requires buyers to transfer payment to an escrow address that has not one but three passwords; the combination of any two releases the funds. The buyer and seller both hold one password, so when both parties are satisfied, they can agree to transfer payment out of escrow to the seller.

If a dispute arises, however, the network assigns an independent arbitrator, who holds the third key. The arbitrator breaks the tie by transferring the money to one of the two parties (after first sending a percentage into his or her account as a fee).

Centralized marketplace operators, such as Uber, Etsy, eBay, and Airbnb, also perform the essential function of reputation tracking. They solicit reviews from buyers after each sale is complete and tabulate the results. This helps ensure that the stranger getting into your car or staying in your spare bedroom isn't planning to rob you, or worse.

Users of decentralized peer-to-peer marketplaces are anonymous, so they're not accountable for what they say, which is why review systems pose a unique challenge in these networks.

Brian Hoffman says that OpenBazaar is considering a system that allows its participants to "burn" bitcoins, or take them permanently out of circulation by sending them to dead addresses that nobody owns. The idea is that by destroying some of their money, users prove their commitment to the network—demonstrating that they have skin in the game—so their ratings and reviews are given more weight. This would also weed out spammers and trolls. Hoffman is working on another approach that would mimic Google's page-ranking system by basing users' reputations on whom they've done business with, and then whom those people did business with, and so on, to create a pyramid of trust.

If They Build It, Who Will Come?

There's karmic justice to the notion of using computer code to make the jobs of Silicon Valley executives irrelevant, but are consumers really clamoring for a service to duplicate what eBay already does so well? Hoffman says saving money will be a big enticement: eBay generally takes at least 10 percent of every sale, while OpenBazaar, which has no shareholders, creditors, or paid staffers, is free to use.

Privacy is another selling point. Stored on eBay's servers are the identities, payment information, and buying histories of all its users. The company is known to routinely hand over information to the government—in fact, it maintains a separate portal to make it easy for law enforcement agencies to query eBay's servers. Decentralized peer-to-peer marketplaces have no servers and keep no information on their users whatsoever. And all the personal information traveling through the network is encrypted.

Mr. Knuckle, the pseudonym of one of the lead developers of NXT FreeMarket, says the project is an effort "to route around the system and do the things you should be allowed to do, like trade peacefully." A self-described anarchist who says he isn't breaking the law, Mr. Knuckle still won't reveal his identity because "I don't trust the government not to come and arrest me anyway and stick me in a cage where I can be raped."

All these projects were created with grim awareness of the fate of Silk Road, an e-commerce site primarily for illegal drugs that thrived from 2011 to 2013. Though Silk Road encrypted the identities and transactions of all participants and required payment with bitcoins, it was a centralized marketplace, and that was its downfall. Silk Road concealed the location of its servers, but the FBI eventually tracked them to Iceland, and in October 2013 the Reykjavik Metropolitan Police pulled the plug. The FBI also arrested Ross Ulbricht, the then-29-year-old libertarian founder and alleged operator of the site, and he now potentially faces life in prison after being found guilty of seven charges in a New York federal court.

NXT FreeMarket has no plug to pull.

Mr. Knuckle says he has no personal interest in facilitating the sale of narcotics. He thinks that it's "inevitable" drug dealers will use platforms like NXT FreeMarket, because nobody can stop them. But that's not the point, he adds. These marketplaces will be particularly useful in repressive countries where "many more things are illegal" than drugs.

Even so, filling the void left by Silk Road, which helped make drug buying safer, is one thing. These services could also be used for truly nefarious purposes, like selling stolen bikes and credit cards. eBay collaborates with law enforcement agencies primarily to combat run-of-the-mill theft, and even Silk Road banned the sale of child pornography and stolen goods. On these new peer-to-peer platforms, that won't be possible.

Mr. Knuckle says NXT FreeMarket will eventually roll out a "blacklisting option, by which a user can set a preference to filter out any listings," but ultimately he thinks even genuinely criminal activities on these sites are the price of freedom. OpenBazaar's Operations Lead Sam Patterson says the creators of a decentralized peer-to-peer marketplace "aren't morally responsible for the way it's used," just as the creators of the Internet itself aren't responsible for what people do with it. He's confident "it won't primarily be used for immoral purposes."

Credit: Todd Krainin

Other forms of product censorship could entice users. Patterson, whose day job is working as a technology policy analyst with the Charles Koch Institute (his employer has no involvement in OpenBazaar), points to a recent move by the e-commerce platform Etsy to ban listings that use the term "redskins" because it's "disparaging and damaging to Native Americans," as the company explained in a blog post. "Freedom of speech," Etsy solemnly stated, "is not without limits."

"It's the company's platform and that's Etsy's right," says Patterson, but on OpenBazaar "nobody can censor trade." That's a feature that in theory could siphon business from the world of Etsy into this cypher world.

Neither drug dealers nor the purveyors of homemade Chief Wahoo memorabilia, however, have yet to find OpenBazaar. If you log in to the platform today, you might purchase a video game cartridge for the game "Kaboom!" that works on a first-generation Atari, a bottle of raw honey, a T-shirt that references the British sci-fi series Doctor Who, and other sundry items. NXT FreeMarket recently had nine items for sale on its platform, including a windhorse sculpture and silver maple leaf.

Both operations are in an early test stage so their low usage rates are hardly damning, but ultimately getting users who are more interested in selling their wares than yammering about Bitcoin's potential to revolutionize the economy will be an enormous challenge. These projects aren't designed to make their creators fabulously rich or, in most cases, attract venture capital funding—so where's the advertising budget supposed to come from?

Software engineer Steve Dekorte, 43, a co-creator of the decentralized peer-to-peer marketplace Bitmarkets, is candid on this subject. "We know how to write software, so we can put together an app in a pretty straightforward way, but we have no idea how to market it," he says.

Dekorte, a libertarian who's passionate about using his technical skills to bring positive social change, admits that "practically nobody is using" his service either, which launched in November. "I'm really interested in solving that problem." This issue is a "sensitive" one, says Mr. Knuckle. "We have built it; now will people come?"

Mike Hearn, a former Google engineer and an influential figure in the Bitcoin community, says that decentralized peer-to-peer marketplaces seem tailored to the specific needs of drug dealers. If criminals are the only ones to participate, "the whole reputation of these things will be tarnished." How many parents would have considered buying diapers on Silk Road, even if they were on sale at 10 percent below Amazon's price?

Hearn recently developed a Bitcoin app called Lighthouse that mechanizes the complex task of handling money in crowdfunding campaigns. Lighthouse is designed as a tool that platforms wanting to compete with Kickstarter and Indiegogo can integrate into their websites. But it doesn't aim to decentralize every aspect of crowdfunding at once. Hearn suggests developers follow his lead and look for piecemeal ways to integrate blockchain technology in areas where existing companies are weakest.

The decentralization movement is trying to live up to Fuller's adage that the best path to changing the world is to build a better one and then convince people to move there. But convincing people to move will be damn hard.

Real World Problems

Matan Field, of the decentralized peer-to-peer ridesharing platform La'Zooz (Hebrew for "to move"), says he's well aware that similar ventures have failed because they didn't attract enough users. So from the outset his team has focused its energies on solving this problem.

The need for a critical mass of users is particularly important when it comes to transportation platforms; Uber customers have grown accustomed to the luxury of always having a car nearby with a few minutes' notice. If La'Zooz is going to compete, Field realizes, he has to flood the streets with vehicles participating in the network.

Field's solution is to get Zooz tokens—the currency that riders and drivers exchange on this new network—out into the world before the service even launches. His idea is that once the currency is in wide circulation, people will use it. So in the early stage of the venture, riders or drivers can earn Zooz tokens simply by driving around with the La'Zooz app open on their phones, which is a way of rewarding early adopters. (The app tracks geolocation and compensates users for distance traveled.) Since mid-August, when the app went live, about 1,200 users have mined Zooz tokens, says Field, which is nowhere close to the participation level the network will need to become a viable transportation service.

Tokens can also be purchased using cryptocurrency from an informal bank that's operated by the La'Zooz community. Each token will also be assigned to correspond with a fraction of a bitcoin, which will integrate the network into the Bitcoin blockchain. That way, when Zooz tokens are traded, no third party is required to confirm that the money changed hands, because a record of the sale will be verified and recorded to Bitcoin's distributed ledger. (This method of anchoring new currencies to the Bitcoin blockchain, part of what's known as Bitcoin 2.0, is currently all the rage in the cryptocurrency community.)

Insurance is another hurdle for a burgeoning ride-sharing service. Personal policies generally don't cover accidents for cars with paying passengers. Field's solution is to start by limiting the cost of a La'Zooz ride to a share of the drivers' costs—gas, tolls, and something for wear and tear on the car. As long as drivers aren't profiting, he says, there's no issue with regulation or insurance. But not only does this severely limit the network's ability to get drivers to participate, it also won't necessarily give the network the regulatory immunity Field thinks it will. In the U.S., at least, regulators and insurance carriers generally forbid the drivers of vehicles that aren't properly licensed and insured from accepting any form of compensation, whether they are profiting or not.

Field, who did his Ph.D. work on String Theory, a unified explanation for the workings of the universe related to particle physics, seems to approach the challenge of solving the information problems inherent to a decentralized marketplace with the same zeal that he might have for tackling a difficult math proof. But it'll be a different sort of challenge convincing customers who just want a convenient late-night ride home from the bar to grapple with La'Zooz's many intricacies. Field may be building a system that's too complex to sell.

Steve Dekorte of Bitmarkets says that despite these early problems in finding users, the rise of the decentralized peer-to-peer economy is inevitable. Bitcoin and cryptography are such powerful tools that their manifest benefits will eventually win over a mass public. "I can't imagine how this could be stopped without the government imposing totalitarian-like controls," he says.

This notion that in the tech space certain ideas have a momentum of their own is reminiscent of Wired co-founder Kevin Kelly's theory of the "technium," the subject of his 2011 book, What Technology Wants. Kelly imagines new innovations as part of a complex interconnected web that acts like a living organism, proliferating according to its own logic.

There's little doubt that Bitcoin or similar technologies will, in one way or another, make the world freer, richer, and more equitable. But a lot of false starts and failed ventures are likely along the way to a more libertarian world.